Good morning partner,
Few things to cover this morning:
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Friday’s Session
Markets closed the week with a broader rebound on the S&P 500, with the majority of the beneficiaries being outside of the AI complex this time around.
Most interestingly, NVIDIA and Micron failed to join the broader rally just days before the news of “curving AI growth” narratives came out.
OpenAI and Anthropic CEOs have now communicated, in a very explicit manner, that they will aim to slow down the pace of AI development in order to “save humanity.”
I remember a time when these CEOs were proudly telling us that AI will come for all our jobs and replace us entirely, and now they want to save us from AI?
Sure, here’s what I really think is happening underneath:
They won’t be able to meet revenue/adoption targets, and now need the perfect excuse to justify that horrible outcome
This admission, before the record IPOs, could potentially mark the top of the AI trade for now, which would explain why two of the biggest beneficiaries of the thematic investment failed to join the broader rally.
Now notice the names that led the day, hyperscalers mostly.
If the AI trade is effectively beginning to unwind, then these companies will see a free cash flow wave coming back to them in no time.
In other words, the tug-of-war will come to an abrupt ending in favor of quality cash flows and fundamentals.
Let’s take a look at Friday’s leaders and laggards:
Industrials, Communications, Technology.
The industrials leadership was in large part due to defense names like Boeing and Lockheed Martin, with a secondary push coming from the AI buildout names like GE Vernova, AAON, and Caterpillar.
Comms and tech were mainly explained by the hyperscaler relief, nothing much to say about that.
The divergence in industrials, combined with the fall of utilities, does say a lot about what the potential AI top is going through.
Utilities are the end-enabler of these data centers at the end of the day, gaining from power contracts and rising utilization rates across a larger geographical footprint.
So, if the AI trade is really beginning to top and rotate, it would make sense for money to see one last run in the names that are currently collecting the cash flow from compute commitments and building expenditures.
Which is some of the industrial complex.
What’s Really Being Said
Let’s really dig into what’s being said about the AI frontier right now.
OpenAI, Anthropic, and even Elon Musk have now stepped in to call for government regulation and for the development of AI to slow down significantly.
In other words,
These people want the government to get involved so that at the end of the day the government can be blamed for the failures of AI, and in this manner justify a potential bailout (a la 2008.)
More than that,
You don’t look to kill a business that is growing by so much and delivering record profitability, unless the numbers they are throwing around are in fact a lie and manipulated figures.
Whether that’s true we can’t know for sure, but what I can tell you is that both OpenAI and Anthropic are bleeding market share as shown by token spending volumes.
So, in reality, these people are just looking for a scapegoat to the fact that they will massively miss their adoption and revenue targets altogether.
I expect price action to reflect this fact over the week ahead.
News
Consumer Sentiment Readings fell by over 7% as a result of a hotter inflation print, people are now paying a lot more for services like fuel and electricity on a two-part resource depletion from Iran and AI.
Kroger’s Earnings Show consumers are becoming more selective about what they buy, as volume of sales and outlooks were cut due to a lower average spend per customer on fewer items.
Leopold Aschenbrenner Returns to the options market, making big bets on AI and memory names like SanDisk, SK Hynix, and DRAM. Perhaps there’s a second - bigger - bailout wave coming about.
Demand for VIX Call Options spike as traders begin to hedge their books against a potential volatility event coming up, which we may just get with AI CEOs admitting defeat plus a real rate hike on our hands this week.
Movers & ES Levels
Vicor 📈 Popped over 11% after announcing new chipmaking capacity acquisitions, for once I’m happy to have this name as part of our long/short book on AI buildout names.
Dell 📈 Gained just under 12% after its CFO announced better-than-expected AI server demand, suspiciously good timing from Trump’s announcement to “go out and buy a Dell.”
NuScale Power 📉 Lost over 15% after UBS analysts downgraded the stock to “Sell” citing lengthier times to fulfill on project deliverability, a fresh hit to the old “your capex is my gain” narrative for AI.
Oklo 📉 Slipped more than 9% after announcing a new share issuance at the record-high valuation levels, reiterating my view on the peak capital cycle surrounding all of these recently hot technology stocks.
Now let’s get into some ES levels for today.
We have now closed another week below the key cutoff level of $7,700.
As these weaker closes begin to build on top of each other, I suspect buyer reaction will continue to weaken, especially as we lose other important levels below.
For Friday’s close, it was evident my given level of $7,625 acted as a strong area for aggressive buying to take place, and it is now where most buyers sit “trapped” for the current distribution.
What’s interesting is that we reached a ceiling roughly at $7,680 without any aggressive selling activity.
This tells me either aggressive $7,625 buyers took profit and flattened their books ahead of the weekend’s events, or that most selling activity took place on the passive end of things.
Both are enough to signal a weaker structure, meaning it didn’t take much for the market to slow down completely even after a sharp 50-point run or thereabout.
For this week, I am considering expanding the range from $7,680 down to $7,550. A break lower could very well get us to $7,515 after the Fed decision or further comments out of the AI slowdown.
On the upside, I am still looking for $7,700-$7,725 to be taken and see several closes above this range, otherwise I cannot turn bullish prematurely on this market filled with tail risks.
Portfolio
A swift recovery from our momentum factor exposure holdings.
What I am most excited for is to see how these latest comments out of AI labs will affect the buildout names currently held in a long/short strategy.
So far, they’re not going bad nor good, just trending along waiting for a volatility event.
Depending on how the news affect them, I will decide whether to cut them or let them run further, but what I do know is that the long/short options book on memory names will continue to deliver hefty profits this quarter.
A similar structure on the call side with China is chugging along just fine as well, lining the portfolio up with another paycheck at the end of October or so.
All of these plays, and the reason why I am leaning on them for the fourth quarter, are laid out in my September portfolio review:
Here’s the positioning update for today’s premium members:
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